Journal of Real Estate Finance and Economics, 19:3, 259±262 (1999)
# 1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Discount Point Concessions: Comment
TERRENCE M. CLAURETIE
University of Nevada, Las Vegas, Department of Finance, Las Vegas, NV 89154
This article comments on a recent article by Asabere and Hoffman. It addresses calculation and econometric
measurement issues of their work and offers an explanation for their (anomalous) ®ndings.
Key Words: discount points, house prices, capitalization
In a recent article in this Journal Asabere and Hoffman (AH) (1997) report the results of
an empirical test of the capitalization of seller-paid discount points and seller-paid closing
costs into house prices. The methodology follows that developed in the 1980s to test the
capitalization of below-market-rate ®nancing. Their results are anomalous to the extent
that they ®nd ``excessive'' capitalization. They conclude in their example that a
homebuyer may trade off $3,200 in points for a price increase of $7,424. Their explanation
of this overcapitalization lies in the bene®ts the homebuyer receives, including the tax
deduction of discount points.
There are, however, errors in their calculation and results. To see this follow their
example. Table 1 repeats their example of the ``classic'' case and the case of seller-paid
discount points. The classic case is without discount points and an interest rate of 8 percent
on an $80,000 loan. The case with seller-supplied points involves $3,200 in points and a
7.5 percent rate on the same loan amount as the classic case. Points equal 4 percent of the
loan amount. The savings in payments ($28 per month) when capitalized over thirty years
is worth $3,816 (slightly more than the points), and the tax saving is $2,304, a total bene®t
of $6,120. However, the tax saving is miscalculated. The tax savings (at 28 percent tax
rate) is not $2,304 but rather $896. Thus, in their example the total bene®t is only $4,712.
The overcapitalization is exacerbated by this miscalculation. The results are even more
anomalous if the homebuyer does not capitalize the payment savings over the full term of
In addition, AH overlook the fact that the amount of the mortgage to be ®nanced
increases with the price of the house if the buyer's equity is ®xed (in their example, at
$20,000). This increases the amount of the payments, even at the reduced rate of interest,
lowering the payment difference and the capitalized savings.
Another potential problem with their results is that the tax code did not allow a
homebuyer to deduct discount points paid by the seller until 1994. Their data include sales